Economic Warfare: Iraq and the I.M.F.

This week, the International Monetary Fund will be holding its annual meeting in Singapore. No doubt, the economic restructuring and forced leveraging of Iraq will be a key component of talks surrounding the meeting. In these past few months, free trade zones have been established along the borders with Syria and Iran; foreign investment laws have been vetted and approved; and laws governing investment in the oil sector have been drafted and introduced. Iraq continues to move forward in implementing conditions imposed upon it through the Stand By Arrangement with the International Monetary Fund (IMF) in December of 2005. While the command economy established under Saddam Hussein’s regime was unsustainable, it is also highly probable that the benefits of the economic restructuring under way at present will accrue to the benefit of an elite segment of Iraq and of the international community. It is improbable that ordinary Iraqi citizens will be the beneficiaries of these changes.

The blueprints for this radical restructuring of Iraq’s economy are contained within the parameters of the Stand By Arrangement (S.B.A.) between Iraq and the I.M.F. Implemented in December 2005, this so-called “agreement” was reached between the IMF and Iraq’s transitional government, at the final hour before the first government elected under Iraq’s new constitution assumed office.

The S.B.A. is a condition imposed by the Paris Club [1] when its members opted to reduce their claims of debt against Iraq. Paris Club members claimed some $40 billion in debt against Iraq in December 2003. Other countries and multinational countries claimed some $85 billion in debt against Iraq. This debt was built up under the regime of Saddam Hussein and accrued mostly to the benefit of the regime rather than to the benefit of the Iraqi people as a whole. That is, it was mostly accrued to fund the build up of Hussein’s military, his regime’s internal security apparatus and his regime’s war against Iran rather than to provide for the Common Good in Iraq—schools, health care, jobs, housing, etc.

In December 2004, the Paris Club members determined that they would reduce its claims against Iraq by 30 percent. It further determined that they would reduce their claims against Iraq by an additional 20 percent once Iraq entered into a Stand By Arrangement with the I.M.F. This occurred in December 2004. The Paris Club members further determined they would reduce their claims against Iraq by a final 30 percent when the I.M.F. certifies that Iraq is in full compliance with and completion of the conditions imposed by the I.M.F.

The terms of the I.M.F. arrangement, and its impact upon ordinary Iraqi citizens, is becoming increasingly clear. The economic war against Iraq continues unabated.

Fuel subsidies have steadily declined over this past year, with a concomitant increase in the prices which Iraqi citizens pay for fuel. The I.M.F. requires that the fuel prices paid by Iraqis continue to be increased, as the subsidies are further reduced. By the end of the year, the official price for regular gasoline and diesel fuel is to cost twice as much as it did when the S.B.A. came into effect in December 2005. Kerosene is to cost 4 ½ times as much.

The increase in fuel prices is a driving factor of inflation in Iraq. In June, inflation stood at 58 percent. As noted by the I.M.F.:

“Most of the increase in prices of fuel and electricity, and of the majority of the other inflation components, occurred early n 2006….However, upward pressure on prices appears now to be fanning out to all items….By May 2006, prices of all items were growing in the range of 15 – 30 percent, although fuel and electricity prices were still growing much faster, resulting in a year on year increase of 58 percent.” [2]

Food prices increased by 26.6 percent from May 2005 to May 2006; rent by 37.5%; and transportation / communication by 119.4%. [3]

As fuel and electricity costs escalate, so too do the costs of life’s staples. Without electricity it is not possible to power refrigerators to store food—so the price of ice bars, the alternative to refrigerators, goes up in Anbar province. [4] Increased fuel costs drive up the costs to bring food to market, so food prices increase. Demand for clay jars and jugs increases, along with the price, as people seek other means to store food, given the lack of electricity to power refrigerators. [5]

As Iraqis struggle to make ends meet, spending shifts away from other items. This shift in spending reverberates through the economy, as other trades see the demand for their work and skills decline. Mahmud Tahir is a tailor in Basra whose business, and sustenance for his family, are in decline. He says,

“Three months ago, I used to finish five to seven deshdashahs [Arabic gown for men] every day. Now, I can finish one deshdashah every two days. This makes it very difficult for me to manage my family’s needs. Perhaps the reason behind this recession is that Basra citizens are not paying attention to their clothing, because they are more worried about their every day life and their living problems Obviously, the increase in prices of essential foodstuff such as meat, fish and vegetables has drained all their budgets. Perhaps the reason is that people prefer not to go to the markets for shopping because of the deterioration of the security situation and fear of the unknown.” [6]

The I.M.F. report only barely traces upon this harsh economic reality faced by Iraqi citizens. Indeed the I.M.F. report does not even mention the other side of the coin which afflicts Iraq—unemployment.

At the end of June, 59 percent of Iraq’s labor force capable of gainful employment was unemployed. Of those with work, 31 percent held only temporary or seasonal jobs. The circumstances faced by Iraqi women was infinitely worse. 85 percent of Iraqi women are unemployed. [7]

With inflation and unemployment out of control in Iraq, we can toss out the old Phillips Curve we learned in high school economics. The Phillips Curve hypothesizes that inflation and unemployment move in opposite directions—clearly not the case in Iraq.

Earlier this year, Iraq’s Labour and Social Affairs Ministry released a survey that estimates that 20 percent of Iraqis live below the international poverty line. Layla Kazim, Director of the Ministry’s Social Affairs Office, was cited as saying that 2 million families live below the international poverty line of $1 per day per person residing in the household (as defined by the World Bank) [8], the best the I.M.F. (along with its ally at the World Bank) can do in its plan for Iraq is to further undermine the Public Distribution System and gut the wage and pension law.

Iraq is implementing, at the behest of the I.M.F. and World Bank, a new “social protection program” which will likely ultimately replace the Public Distribution System of food rations established under the sanctions regime. In June the new “social protection program” was covering 430,000 families which earn less than $2 per day. The goal is to cover 1 million families by the end of the year. [9] The Public Distribution System of food rations was created under the sanctions regime to provide a modicum level of sustenance for Iraqis, with most Iraqis depending upon the PDS program. As of June 2004, fully 60% of Iraqis depended entirely upon the PDS program for their daily sustenance. Already the basket make-up of goods provided under the PDS has been significantly reduced. As noted by the I.M.F., Iraq “…intends to reform the more expensive Public Distribution System over the medium term (with the help of the World Bank).” [10]

Curious is the different standards of measurement of the international poverty line being applied in Iraq. Note that the program implemented under the I.M.F. strictures provides relief for families with an income of less than $2 per day. The international standard for absolute poverty, as defined by the World Bank, is $1 per day per person. The I.M.F. imposed plan not only will not provide relief for all Iraqis living in abject poverty, let alone poverty, it will also serve to undermine the Public Distribution System by further placing the social safety net on a purely monetary basis.

The pension law in Iraq is also on the chopping block. In November 2005, Iraq passed a new pension law which was never implemented. This law, if implemented, would permit an employee to retire at age 50 if he / she had 25 years of employment history. The maximum pension would have been 80 percent of the worker’s final salary at the time of retirement. Under the strictures of the I.M.F., Iraq is to “reform” the pension law by the end of September 2006. [11]

It is worth noting that the “Rule of 75” contained in Iraq’s pension law is not so much different from that retirement provision provided for many public sector workers in the U.S. as well as for a few private sector workers with strong unions in the U.S. Under the “Rule of 75” in the U.S., a worker is able to retire with full retirement benefits when the sum of the number of years worked with a specific employer plus her / his age adds up to 75.

It should also be noted that in 2004 the average life expectancy in Iraq was approximately 59 years of age. [12] The World Health Organization estimated in 2004 that the average life expectancy for males was 51 while for females it was 61 (while further estimating that in 2002 the average health life expectancy for males was 48.8 and for females 51.5. [13] Only 4.9% of Iraq’s population in 2004 was 60 years old or older. [14] As in the U.S., the refrain in Iraq, under strictures from the I.M.F. and World Bank, seems to be to cut and shred the social compact between generations of citizens.

As an ominous warning of what may further await Iraqi citizens, the I.M.F. calls for further monetary action to combat the rampant inflation, saying:

“The ongoing insurgency and shortages of goods, as well as supply disruptions generally in the non-oil economy, will continue to put upward pressure on prices. But it remains important that the C.B.I. [Central Bank of Iraq] take decisive measures to contain it before inflationary expectations become entrenched, either by an effective tightening of monetary conditions and / or by exchange rate action. The C.B.I. will need to tighten monetary conditions further if inflation does not start to come down soon. The government can help by keeping public sector wages and pensions in line with the absorptive capacity of the small, albeit growing, non-oil economy, and by making every effort to prevent supply bottlenecks (especially in the petroleum product market) from destabilizing prices further.” [15]

In other words: cut pensions of retirees; limit the wages of public employees; take no action to combat unemployment through public works and other projects; “liberalize” the law to drop all barriers to the private import of gasoline (an already accomplished action); and exercise “fiscal discipline” at all costs.

Indeed, the I.M.F. tips its hand on the potential use of monetary policy to advance its objectives in Iraq when it writes that: “The monetary transmission mechanism, however, is weak. The effectiveness of interest rate changes in influencing inflation is thus very limited. Economic activity is dominated by cash transactions, and the banking system is largely inert. Few loans are extended and the deposit base is not very active. Raising interest rates will nonetheless signal the authorities determination to deal with inflation.” [16]

Iraq’s Central Bank and government is not able to influence the economy through manipulations of the money supply through, for example, changes in interest rates. Given the lack of a fully developed tax structure in Iraq, the government also cannot manipulate tax rates to impact upon the economy. Because of these two key factors, the only recourse left to Iraq’s government is to attempt to manipulate the economy through budgetary measures. The I.M.F. strictures are that Iraq must exercise “fiscal discipline” at all costs. Imagine the tremendous difficulty, if not impossibility, of breaking out of recessions and depressions in the U.S. if the government was forced to exercise “fiscal discipline” at all costs—never being permitted to spend on the Civilian Conservation Corps, the Works Progress Administration, the Tennessee Valley Authority or the Boulder / Hoover Dam project during the Great Depression.

Despite the fact that Iraq operated with a surplus in 2005 (mainly due to a lower than anticipated level of government investment), the I.M.F. is requiring Iraq to operate strictly within its budget for 2006. As noted by the I.M.F., “The determination to contain recurrent spending, and particularly wages and pensions, to the original budget allocations, is an important signal of the government’s respect for fiscal discipline.” [17]

Indeed, the I.M.F. notes with approval that Iraq is “…committed to resist calls for an increase in the wage bill (from additional hiring), and will resist the practice of granting large Eid bonuses.” [18] (Eid al-Fitr and Eid al-Adha are religious celebrations). That is, there will be no additional hiring of the unemployed (no Civilian Conservation Corps of Great Depression era United States) and an actual cutting of income by the elimination of holiday wage bonuses.

The I.M.F. seems to be conceding that monetary policy will not be useful in combating inflation in Iraq. At the same time, it is removing fiscal policy as a tool to address unemployment by not allowing Iraq to exceed allocations in its 2006 budget. The U.S. saw a version of this happening in the 1970’s and through the Reagan Depression when both inflation and unemployment were high, though not nearly to the levels of unemployment seen in Iraq. We had a word for it then—stagflation. And wage-and-price control efforts did little to correct the underlying economic malaise of the country. Why should it be expected that wage controls in Iraq would serve any useful purpose at this time?

All of this brings us back to the issue of the odious debt incurred by Saddam Hussein’s regime in the 1980’s. It is this debt which creates the economic leverage of the international community—led by the U.S. and its allies in the Paris Club—to force the economic restructuring of Iraq. While the debt claimed against Iraq is now reduced by 50%, Iraq must comply with the strictures of the I.M.F. before the claims are reduced by an additional 20%.

The third stage of debt claim reduction should take place in 2008, but only if Iraq complies with the strictures of the I.M.F. If Iraq acquiesces and complies, the outstanding debt claimed against Iraq will be reduced from $53.4 billion to $29.5 billion. Repayment of debt claims is not being required until 2011, though interest will continue to accrue and be capitalized prior to the start of repayment. As a result in 2010, debt claimed against Iraq will be $59 billion without compliance with the I.M.F. strictures or $33.7 billion with compliance with the I.M.F. strictures. This does not include the $32 billion in outstanding war reparations charges imposed against Iraq by the U.N. following Hussein’s invasion and occupation of Iraq in 1990-91. When combined, Iraq will be paying at least $5.9 billion per year as debt claims repayment and war reparations payments.

The question is: how much longer will the international community be permitted to punish the Iraqi people?

While much work must be done to secure the end of the military occupation of Iraq, we who oppose this war must not lose sight of the economic warfare which is being waged against the Iraqi people. We must demand not only an end to the military occupation and withdrawal of all military forces from Iraq, we must also demand the unconditional cancellation of all the odious debt incurred by Saddam Hussein’s regime. Such an unconditional cancellation of necessity means that all of the conditions being imposed against Iraq by the I.M.F. must be cancelled. Only in this way might the Iraqi people have any chance at owning their own country.